Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto, and other financial information included elsewhere in this annual report on Form 10-K. This report contains forward-looking statements. When used in this report, the words “anticipates,” “suggests,” “estimates,” “plans,” “projects,” “continue,” “ongoing,” “potential,” “expect,” “predict,” “believe,” “intend,” “may,” “will,” “should,” “could,” “would,” “proposal,” and similar expressions are intended to identify forward-looking statements. Actual results in future periods may differ materially from those expressed or implied in such forward-looking statements as a result of a number of factors, including, but not limited to, the risks discussed under the heading "Risk Factors" in this annual report on and elsewhere in this annual report on Form 10-K.
Overview
Usio, Inc. was founded under the name Billserv Com, Inc. in July 1998 and incorporated in the State of Nevada. On June 26,2019, we changed our corporate name from Payment Data Systems, Inc. to Usio, Inc. Our principal offices are located at 3611 Paesanos Parkway, Suite 300, San Antonio, TX 78231. Our telephone number is (210) 249-4100. Our website is located at www.usio.com. Information contained on our website does not constitute part of this prospectus.
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We provide integrated payment processing services to merchants and businesses, including all types of Automated Clearing House, or ACH, processing, credit, prepaid card and debit card-based processing services and statement preparation, presentment and mailing services.
We offer customizable prepaid cards companies use for expense management, incentives, refunds, claims and disbursements, unique forms of compensation like per diems, and more. We also offer prepaid cards to consumers for use as a tool to stay on budget, manage allowances and share money with family and friends. UsioCard platform supports Apple Pay®, Samsung Pay™ and Google Pay™. Our PIN-less debit product allows merchants to debit and credit accounts in real-time. In our over 20-year history, we have created a loyal customer base that relies on us for our convenient, secure, innovative and adaptive services and technology, and we have built long-standing and valuable relationships with premier banking institutions such as Fifth-Third Bank, Sunrise Bank, and Wells Fargo Bank.
Through our Akimbo Now technology we offer a comprehensive money disbursement platform that allows businesses to pay their contractors, employees, or other recipients by choosing between a prepaid debit Mastercard, real-time deposit to a checking account, traditional ACH, direct deposit or paper check.
With the acquisition of the assets of Information Management Solutions, LLC in December 2020, we now offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions. Through the acquisition, we acquired new customers and their sales force.
We reported a net loss of $2.9 million and $5.1 million for the years ended December 31, 2020 and December 31, 2019 , respectively. We have an accumulated deficit of $65.1 million at December 31, 2020 .
In 2020 , we processed $3.34 billion for all payment types, which was down by 5.6% from the record prior year volume of $3.54 billion total dollars processed. Total transactions processed were up 19% to a record 18.2 million. ACH or electronic check transaction processing volumes for 2020 decreased by 12% compared to 2019 . Returned check transactions decreased by 29% in 2020 compared to 2019 . Credit card dollars processed in 2020 increased by 14% compared to 2019 and credit card transactions processed for 2020 increased by 58% compared to 2019 . Both the credit card dollars and transactions processed represent all-time records for the Company. Prepaid card load volume increased by 162% and transaction volume increased by 97%.
To regain and sustain profitability, we must, among other things, continue to grow our top line revenues, grow and maintain our customer base, enhance and continue to refine existing and new successful marketing strategies, continue to maintain and upgrade our technology and transaction processing systems, provide superior customer service, respond to competitive developments, attract, retain and motivate qualified personnel, and respond to unforeseen industry developments and other factors.
We believe that our success will depend in large part on our ability to (a) aggressively drive top line growth, (b) add talented sales people, (c) add quality customers, (d) meet evolving customer requirements, (e) adapt to technological changes in an ever changing market, (f) be opportunistic in identifying and acquiring portfolios that expand or complement our existing customer base and (g) effectively manage our operating expenses as we aggressively scale the business. Our near-term objectives will be focused on aggressively driving top line growth and identifying and acquiring portfolios that complement and support our growth strategy. We will continuously assess the ability of our employees and other resources to achieve our targeted growth and continuously enhance our technology platform to drive our competitive advantage.
Critical Accounting Policies
General
Our management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses, bad debt, investments, intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. We consider the following accounting policies to be critical because the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change or because the impact of the estimates and assumptions on financial condition or operating performance is material.
For a summary of critical accounting policies, please refer to the Notes to Consolidated Financial Statements, Note 1. Description of Business and Summary of Significant Accounting Policies.
Results of Operations
Revenues
Our revenues are principally derived from providing integrated electronic payment services to merchants and businesses, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH, network, the program management and processing of prepaid debit cards.
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With the acquisition of the assets of Information Management Solutions, LLC in December 2020, we now offer additional output solution services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions.
Three Months Ended December 31,
2020
2019
$ Change
% Change
ACH and complementary service revenue
$
2,391,256
$
2,314,021
$
77,235
3.3
%
Credit card revenue
4,806,053
4,534,265
271,788
6.0
%
Prepaid card services revenue
1,025,168
519,106
506,062
97.5
%
Output solutions revenue
1,160,037
—
1,160,037
100.0
%
Total Revenue
$
9,382,514
$
7,367,392
$
2,015,122
27.4
%
Year Ended December 31,
2020
2019
$ Change
% Change
ACH and complementary service revenue
$
8,471,705
$
9,343,974
$
(872,269
)
(9.3
)%
Credit card revenue
19,453,501
17,329,322
2,124,179
12.3
%
Prepaid card services revenue
3,166,580
1,527,239
1,639,341
107.3
%
Output solutions revenue
1,160,037
—
1,160,037
100.0
%
Total Revenue
$
32,251,823
$
28,200,535
$
4,051,288
14.4
%
Total revenues for 2020 increased by 14.4% to $32.3 million from $28.2 million in 2019 . The key drivers of the revenue growth were gains in our Prepaid business line associated with multiple contracts with major cities in the U.S. facilitating disbursements to individuals and families in need of financial assistance and, growth in our PayFac business line. 2020 also included one month of financial results from our acquisition of Information Management Solutions which we re-branded as Usio Output Solutions. Our ACH and complementary service revenues were down primarily as a result of the COVID pandemic and the adverse impact on our non-bank consumer lending business offset by gains in our PINless debit product.
Operating Expenses
Cost of services includes the cost of personnel dedicated to the creation and maintenance of connections to third-party payment processors and the fees paid to such third-party providers for electronic payment processing services. Through our contractual relationships with our payment processors and sponsoring banks, we process ACH and debit, credit or prepaid card transactions on behalf of our customers and their consumers. We pay volume-based fees for debit, credit, ACH and prepaid transactions initiated through these processors or sponsoring banks, and pay fees for other transactions such as returns, notices of change to bank accounts and file transmission. Cost of services expense was $24.9 million and $22.3 million for 2020 and 2019 , respectively. Cost of services expenses increased by $2.6 million, or 11.8% , in 2020 as compared to 2019 primarily due to increased transaction costs associated with our revenue growth.
Gross Profit
Gross profit is the net profit after deducting the cost of services. Gross profits were $7.4 million and $5.9 million for 2020 and 2019 , respectively. Gross profit increased by $1.4 million, or 24.0% , in 2020 as compared to 2019 . The key drivers of the profit growth were incremental profits associated with revenue growth in our Prepaid, Credit Card and Output Solutions portfolios.
Stock-based Compensation
Stock-based compensation expense increased by $0.2 million in 2020 to $1.5 million from $1.3 million in 2019 . The increase in stock-based compensation was a result of the stock grants during 2019 and 2020. Our stock-based compensation expenses for 2020 and 2019 represented the amortization of deferred compensation expenses related to incentive stock grants to employees, officers and directors.
Other Selling, General and Administrative Expenses
Other selling, general and administrative expenses increased to $8.1 million in 2020 from $7.7 million in 2019 . The increase of $0.4 million, or 5.7% represented continued investments in people and related expenses associated primarily with our support of payment facilitation and prepaid growth initiatives.
Depreciation and Amortization
Depreciation and amortization expense decreased to $1.5 million in 2020 as compared to $2.0 million in 2019 . The decrease of $0.5 million, or 24.9% , was primarily attributable to the full depreciation in 2019 of certain assets.
Other Income
Interest income decreased to $59,392 in 2020 from $81,790 in 2019 due to lower interest-bearing cash balances. Other income (expense) was $902 for 2020 , as compared to expense of $32,653 for 2019 . Other income and expense included $813,500 of incremental income associated with the forgiveness of our U.S. Small Business Administration Payroll Protection Plan (PPP) loan in December, 2020.
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Income Taxes
Income tax expense was $23,109 in 2020 and $101,888 in 2019 . The income tax expense represents amounts incurred under the Texas margin tax and Tennessee franchise tax offset by refunds of federal taxes paid.
Net Income (Loss)
We reported a net loss of $2.9 million and $5.1 million for the years ended December 31, 2020 and December 31, 2019 , respectively. The reduction in net loss was primarily related to our increased gross profits generated plus forgiveness of our PPP loan.
Liquidity and Capital Resources
At December 31, 2020 , we had $5.0 million of cash and cash equivalents, as compared to $2.1 million of cash and cash equivalents at December 31, 2019 .
We reported a net loss of $2.9 million and $5.1 million for the years ended December 31, 2020 and 2019 , respectively. Additionally, we reported working capital of $5.6 million and $1.3 million at December 31, 2020 and 2019 , respectively.
We received funding under the Paycheck Protection Program (PPP) as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), administered by the U.S. Small Business Administration. Under the terms of the Note, we received total proceeds of $813,500 bearing interest at a rate of 1% per annum with a maturity date of April 15, 2022. In addition, principal and interest payments will be deferred for the first ten months of the loan. The loan is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. We used the proceeds for payroll costs and other permitted expenses. Under the terms of the PPP, the principal may be forgiven if the loan proceeds are used for qualifying expenses as described in the CARES act, such as payroll costs, benefits, rent and utilities. Our loan forgiveness was approved in full by the U.S. Small Business Administration on December 14, 2020.
On July 1, 2020, Topline Capital Partners, LP purchased 1,796,407 unregistered shares of common stock at an offering price of $1.67 per share in a private offering. The gross proceeds to us from the private offering were $3.0 million.
On September 25, 2020, we entered into a placement agency agreement with Ladenburg Thalmann & Company Inc. for the issuance and sale of an aggregate of 4,705,883 shares of common stock at an offering price of $1.70 per share in a public offering. We agreed to pay Ladenburg a cash fee of equal to $0.12325 per share of common stock sold in the offering as well as legal fees and expenses of up to $100,000. The net proceeds to us from the public offering were $7.4 million, after deducting the offering expenses and fees payable by us.
On February 14, 2019, we entered into a placement agency agreement with Maxim Group LLC with respect to the issuance and sale of an aggregate of 769,230 shares of common stock at an offering price of $2.60 per share in a public offering. We agreed to pay Maxim a cash fee of equal to 6% of the aggregate gross proceeds raised in the offering and legal fees and expenses of up to $40,000. The net proceeds to us from the public offering were $1.8 million, after deducting the offering expenses and fees payable by us. The proceeds were used for general corporate purposes and working capital.
Cash Flows
Net cash provided by operating activities totaled $ 6.3 million for 2020 as compared to net cash used by operating activities of $ 3.7 million in 2019 . After adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations and merchant reserves included in the statement of cash flows, net cash used by operating activities was $ 0.4 million and $ 1.3 million for the year ended December 31, 2020 and 2019 , respectively. The increase in net cash generated by operating activities in 2020 was primarily attributable to increases in our Prepaid card loads and customer deposits acquired with our 2020 acquisition of Information Management Solutions, LLC.
Net cash used by investing activities was $ 6.8 million for 2020 and $ 0.6 million in 2019 . The increase in investing activities includes the cash payment to Information Managements Solutions, LLC of $5.9 million associated with our acquisition and capitalization of internal-use software projects and other capital expenditures.
Net cash provided from financing activities for 2020 was $ 10.0 million compared to cash from financing activities of $ 1.7 million for 2019 . The cash provided by financing activities were as a result of:
The $10.0 million of proceeds from financing activities included $813,500 from PPP Loan proceeds, gross proceeds of $3.0 million from a private offering with Topline Capital Partners, LP and net proceeds of $7.4 million from Ladenburg, Thalmann & Company, Inc. from a public offering (per below) and net of Forgiveness of the PPP Loan in the amount of $813,500 and Treasury stock purchases of $280,269.
We received funding under the Paycheck Protection Program (PPP) as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), administered by the U.S. Small Business Administration. Under the terms of the Note, we received total proceeds of $813,500 bearing interest at a rate of 1% per annum with a maturity date of April 15, 2022. In addition, principal and interest payments will be deferred for the first ten months of the loan. The loan is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. We used the proceeds for payroll costs and other permitted expenses. Under the terms of the PPP, the principal may be forgiven if the loan proceeds are used for qualifying expenses as described in the CARES act, such as payroll costs, benefits, rent and utilities. Our loan forgiveness was approved in full by the U.S. Small Business Administration on December 14, 2020.
On July 1, 2020, Topline Capital Partners, LP purchased 1,796,407 unregistered shares of common stock at an offering price of $1.67 per share in a private offering. The gross proceeds to us from the private offering were $3.0 million.
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On September 25, 2020, we entered into a placement agency agreement with Ladenburg Thalmann & Company Inc. for the issuance and sale of an aggregate of 4,705,883 shares of common stock at an offering price of $1.70 per share in a public offering. We agreed to pay Ladenburg a cash fee of equal to $0.12325 per share of common stock sold in the offering as well as legal fees and expenses of up to $100,000. The net proceeds to us from the public offering were $7.4 million, after deducting the offering expenses and fees payable by us.
Overall, our cash position improved significantly as a result of financing activities completed in 2020.
The 2019 cash provided by financing activities was the result of a public offering which raised $1.8 million in net proceeds. On February 14, 2019, we entered into a placement agency agreement with Maxim Group LLC with respect to the issuance and sale of an aggregate of 769,230 shares of common stock at an offering price of $2.60 per share in a public offering. We agreed to pay Maxim Group, LLC a cash fee of equal to 6% of the aggregate gross proceeds raised in the offering and legal fees and expenses of up to $40,000. The net proceeds to us from the public offering were $1.8 million, after deducting the offering expenses and fees payable by us. We used the funds for general corporate purposes and working capital.
Material Trends and Uncertainties
The ongoing COVID-19 pandemic has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses, “shelter in place” and other governmental regulations, reduced consumer spending due to both job losses and other effects attributable to the COVID-19 pandemic. There remain many uncertainties as a result of the pandemic. As a result of the spread of COVID-19, economic uncertainties could continue to impact our operations. Any potential incremental financial impact is unknown at this time.
At this time, certain states are reducing mandated operating restrictions and efforts are underway to provide vaccinations to as many people as possible. The government has issued several rounds of COVID-19 relief and stimulus payments and other programs to stimulate economic activity and facilitate an economic recovery.
Our business was initially adversely affected as doctors offices, dental offices, veterinarian offices and non-bank consumer lending accounts were ordered closed in connection with curbing the spread of the pandemic. As these doctors, dental and veterinarian offices re-opened, these businesses quickly recovered and returned to levels higher than pre-COVID. Consumer lending merchants were adversely affected by COVID relief payments made during the pandemic and the pause placed on past due amounts owed. The level of activity for consumer lending merchants has not returned to pre-COVID levels. We did receive a gain during COVID in our prepaid business line, as we were able to work in conjunction with major cities across the U.S. to use our prepaid debit cards to facilitate the transfer of money via our debit cards from city foundations to the local residents in need of financial assistance.
The impacts and recovery from the COVID-19 pandemic are still a work in process. We were not impacted in the magnitude of other payment processors as our customer base had limited exposure to retail facing businesses. With that framework, we will continue to monitor the overall impact on our operations and take necessary steps to ensure the safety of our employees and customers.
We continue to monitor the impact of the COVID-19 pandemic closely.
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Warrants
On August 21, 2018, we issued to University Fancards, LLC warrants to purchase 150,000 shares of our common stock. 30,000 warrants vested immediately upon the date on which the first financial transaction was processed on a card account issued under the prepaid agreement, which occurred on October 5, 2018. 120,000 warrants vest annually over 4 years in 30,000 warrant increments beginning on July 31, 2019 and becoming fully vested on July 31, 2022. The exercise price for the 30,000 warrants that vested immediately on October 5, 2018 was $1.80 per share. The exercise price for the remaining 120,000 warrants will be the lesser of $2.00 per share or 120% of the market price of our common stock on the vesting date of the warrant.
On August 12, 2020, we issued 27,051 shares of common stock to University FanCards, LLC in a cashless exercise at $3.46 per common share in exchange for 60,000 warrants exercised by FanCards, LLC. On February 5, 2021, we issued 19,795 shares of common stock to University FanCards, LLC in a cashless exercise at $5.88 per common share in exchange for 30,000 warrants exercised by FanCards, LLC.
On December 15, 2020, we issued to Information Management Solutions, LLC warrants to purchase 945,599 shares of our common stock, $0.001 par value per share, with an exercise price of $4.23 per share. The warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $0.58; (ii) the risk-free interest rate is 0.09%; (iii) the contractual life is 5 years; (iv) the dividend yield of 0%; and (v) the volatility is 59.9%. The fair value of the warrants amounted to $552,283 and will be recorded as an increase in the customer list asset and have a term of five years from time of vest.
Loan and Security Agreement with C2Go, Inc.
Under a loan and security agreement dated February 2, 2016, we loaned the principal amount of $200,000 to C2Go, Inc. with an interest rate of 10% per annum for a term of 18 months. The loan was secured by a first lien on all assets of C2Go. C2Go defaulted under the note by failing to repay the loan plus interest on August 2, 2017. On December 7, 2017, we entered into a note purchase and settlement agreement with C2Go and Mercury Investment Partners LLC.
There are no assurances that we will be able to recover the remaining $145,000 principal and there are no assurances there will be any assets for us to recover from its lien on all the assets of C2Go if payment in full of the obligation is not made. The loss reserve on the note receivable as of December 31, 2020 and 2019 , was $145,000 reflecting a "more likely than not" recognition threshold.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
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